Connecticut Department of Revenue Services Update and Initiatives

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1 Connecticut Department of Revenue Services Update and Initiatives Presented to Connecticut Society of CPAs June 21, 2018 Lou Bucari, General Counsel Department of Revenue Services

2 Overview of Discussion Recently enacted legislation Significant Court cases Things to come? Current Department initiatives Fresh Start Collections Enhancement Remote Sellers Other Guidance issued by the Department in 2018 Page 2

3 State s Tax Landscape According to the Department s most recent Annual Report (covering fiscal year ): The Department collected $17.3 billion in state taxes in fiscal year Eighty-three per cent (83%) of this amount was attributable to the income tax ($9.0 Billion), the sales and use taxes ($4.4 Billion), and the corporation business tax ($990 million) Department s website: Page 3

4 Recently Enacted Legislation Response to federal tax reform (2018 Conn. Pub. Acts 49) Pass-through entity tax - Pass-through entities are now subject to an entity-level tax. The new tax is intended to be revenue-neutral. Municipal charitable option - Authorizes municipalities to provide property tax credits for donations made to certain charitable organizations. IRS Notice Guidance on Certain Payments Made in Exchange for State and Local Tax Credits Page 4

5 Pass-Through Entity Tax Pass-Through Entity Tax ( PET ) is imposed on entities that do business or have income derived from Connecticut sources PET applies to all S corporations and all entities taxed as partnerships for federal tax purposes PET does not apply to publicly traded partnerships, sole proprietorships, and SMLLCs that are disregarded for federal income tax purposes

6 Pass-Through Entity Tax PET rate is 6.99% (which is the highest marginal rate of Connecticut income tax) There are two bases: The Standard Base is the default base and must be used unless an election is made to use the Alternate Base Decision to use Alternate Base is made annually (and must be made on or before due date of return)

7 Pass-Through Entity Tax Standard Base PET applies to the Connecticut source income of the entity Connecticut source income is determined under Connecticut income tax rules Alternate Base The Alternate Base is equal to the resident portion of unsourced income plus modified Connecticut sourced income Resident portion of unsourced income means unsourced income (i.e., income that is not sourced to Connecticut or another state with which entity has nexus) multiplied by the percentage of interests in the entity held by Connecticut residents Modified Connecticut source income equals the Standard Base multiplied by the percentage of interests in the entity owned by individual members subject to Connecticut income tax

8 Pass-Through Entity Tax Relevant Guidance Special Notice 2018(4), Guidance on 2018 Estimated Payments for the Newly Enacted Pass-Through Entity Tax OCG-6, Office of the Commissioner Guidance Regarding the Calculation of the Pass-Through Entity Tax CT-1065/CT-1120 SI ES (Estimated Payment Coupon)

9 Recently Enacted Legislation Bonus depreciation - Connecticut s income tax is decoupled from the federal bonus depreciation in the recently passed Tax Cuts and Jobs Act of (Note: The change is effective for the 2017 taxable year, so amended returns may be required for those affected taxpayers who have already filed returns.) OCG-5, Regarding the Treatment of Bonus Depreciation for Connecticut Income Tax Purposes Interest expenses - Connecticut corporation business tax decoupled from the new federal limitation on interest expenses. Corporation business tax dividends received deduction - Beginning with income year 2017, the dividends received deduction for all foreign dividends arising from mandatory federal repatriation rules will effectively be limited to 95%. Page 9

10 Recently Enacted Legislation Marketplace fairness For sales occurring on or after December 1, 2018, marketplace facilitators will be required to collect and remit sales tax on sales made through their marketplace. Out-of-state sellers with at least $250,000 in sales into Connecticut and more than 200 transactions will also be required to collect and remit sales tax. Also effective December 1, 2018, legislation introduces concept of referrers. Boat sales - The sales tax rate on boats, boat engines, and boat trailers is reduced to 2.99% beginning on July 1, (Note: Dyed diesel sold to marine fuel docks for marine purposes will no longer be subject to the motor vehicle fuels tax.) Page 10

11 Recently Enacted Legislation Income tax credit for taxes paid - Beginning with taxable year 2019, Connecticut residents who work in New York can receive a credit for taxes paid based on the New York Voluntary Employer Compensation Expense Tax. Income tax sourcing rules - Residents of states with a convenience of the employer test will be subject to similar rules for work done for a Connecticut employer. Gift and estate tax changes - Beginning in 2020, Connecticut will increase its gift and estate tax threshold annually through 2023 when it will match the federal threshold. Page 11

12 Significant Court Cases South Dakota v. Wayfair, Inc. et al, No (Argued April 17, 2018) Sales tax nexus Will the Unites States Supreme Court overturn Quill? When will the decision be issued? Sobel v. Commissioner of Revenue Services, Docket No S (March 7, 2017) Taxation of carried interest Implications for hedge funds Pending before the Connecticut Appellate Court Page 12

13 Things to come? Murphy v. National Collegiate Athletic Association et al, No (Decided May 14, 2018) United States Supreme Court struck down a 1992 federal law that effectively banned sports betting. What will Connecticut do? Will there be a special legislative session? There were two proposals considered by the Connecticut General Assembly during the 2018 regular session regarding sports wagering House Bill No Senate Bill No. 540 Page 13

14 Current Initiatives Fresh Start Initiative Another amnesty? What is Fresh Start? Voluntary compliance incentive program Qualified taxpayer (applies to businesses and individuals) Initiative runs through November 30, 2018 Authorizes the Commissioner to enter into Fresh Start Agreements Waiver of penalties and 50% of interest Limited look-back period Page 14

15 Current Initiatives Other Department Initiatives Remote Sellers Initiative Collections Initiative Tax Gap Initiative IT Modernization Project Page 15

16 Other Guidance OCG-4, Office of the Commissioner Guidance Regarding the Connecticut Tax Treatment of the Federal Repatriation under IRC 965 Corporation Business Tax Income Tax Payment Plans Page 16

17 Questions? Thank You! Page 17